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Essay On Quantity Theory Of Money

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The Quantity Theory of Money is a theory that states the amount of money in circulation inside of an economy is the main factor to the level of prices for goods and services and mainly, purchasing power, assuming the velocity of money is stable. According to the theory, as more money is in circulation in the economy, the level of purchasing power decreases and as there is less money in circulation, the level of purchasing power increases. In a sense, it means that the more money that is in the economy, the less strong it comes and on the other side, if there is less money in the money, then that money is worth more. All of these factors are assuming that the velocity of money, which is the rate of demand for money in the economy (Humphrey pg. 2). According to the Quantity Theory of Money, the change in the percentage of money in an economy will be identical to the percentage change in prices. For example, if there is a 5% increase in the amount of money in circulation, then there will be exactly a 5% increase in prices. This supports the theory’s hypothesis that in the Quantity Theory of Money, the amount of money is the independent …show more content…

This concept of a higher supply of currency is viewed as the main reason for inflation. By using the definition of the Quantity Theory of Money, one can see how inflation can be explained (Humphrey pg. 2). Inflation means the loss of purchasing power due to higher prices and the Quantity Theory of Money states that prices of goods and services are driven up due to the addition of more currency into an economy (Oner pg. 45). By using the Consumer Price Index, one could calculate the percentage of the rise in the price of goods and services purchased by households that is caused by inflation from any specific given time (“Consumer Price Indices: A Brief

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